Why SanDisk Will Have A Good Run This Quarter

Flash storage chip maker SanDisk Corp (NASDAQ:SNDK) is all set to release its second-quarter 2014 results tomorrow, and investor optimism is quite visible through the stock’s rally. In the past three months, shares have moved up by an incredible 40.15%. So, what’s the secret behind such improvement? Let’s take a look.

Signs of Another Quarter of Positive Surprise

The company has been posting better than anticipated numbers in the past quarters, and now again the street expects SanDisk to post a quarter of surprise. The primary drivers for the improvements were growing demand for its storage solutions, especially the high-margin solid-state-drives (SSDs), along with increased manufacturing efficiencies.

As per data compiled by Yahoo Finance, the aggregate average earnings estimate for the current quarter pegs at $1.39 per share, which moved up from $1.34 estimated three months ago. The earnings estimate for the quarter reflects 15% growth from $1.21 per share recorded in the year ago quarter. Next, coming to the top line, analysts expect the company’s revenue to grow roughly 8.3% year over year to $1.6 billion, higher than the midpoint of company’s expected range of $1.55 billion-$1.625 billion.

Even research analysts at investment banking firms such as Goldman Sachs and Stifel expect SanDisk to maintain its earnings momentum in the current quarter.

Higher Product Sales will be the Key Driver

Considering the product mix to remain favorable for the rest of 2014, SanDisk forecasted sales of its embedded solutions (for mobile devices) and enterprise SSDs to remain strong in the second quarter. During the first quarter conference call, SanDisk mentioned that the company’s SSD footprint expanded globally. It also forecasted to generate more contribution from SSDs in 2014.

The company is positive about its iNAND embedded flash drives as it expects some shift in customer preferences toward the company’s embedded storage solutions. Last February, the company launched its next-generation high-performance iNAND Extreme, built upon its 1Y nanometer technology. The new embedded storage solution will help to reduce latency while boosting bandwidth, enabling mobile gadgets (smartphones, tablets, laptops) to run multiple applications easily. The company expects the demand for iNAND Extreme to go up globally, and particularly from China’s mobile manufacturers.

Technology research firm Gartner expects chip sales to grow 6.7% globally in 2014, mostly due to increasing demand for memory chips. SanDisk, with all its flash memory storage solutions, stands to benefit greatly from this growth trend.

Cost Reduction to Boost Profitability

SanDisk mentioned in its last call transcript that cost improvement trend could be maintained in the range of 15% to 25%. In the last quarter, the company’s blended cost per gigabyte was reduced by 23% year over year. Owing to this, cost of sales during the first quarter declined 7.3% to $741 million compared with the prior year period. The cost improvement helped to offset the decline in blended average selling price, which fell 7% year over year, last quarter. As a result, gross margin improved 1,070 basis points.

However, the company expects second-quarter gross margin in the range of 47%-49%, and the slight sequential decline has been attributed to the change in product mix (growing sales of low-margin iNAND chips). But the ongoing transition into further lower geometries (19 nanometer, 16 nanometer) will help drive the production capacity, ultimately bringing down the cost per bit.

Last Words

SanDisk has had a great start to this fiscal and it would not leave any stone unturned to keep the ball rolling. It’s continuously launching new products to monetize the uptrend in SSD and memory chip consumption. Not only this, it’s relentlessly trying to keep costs down to boost profitability. With so much going on, the numbers of the quarter can be expected to make the investors smile. So, let’s wait for few more hours and see how SanDisk’s efforts get paid.

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